Depreciation
Depreciation is a simple concept and most people who have ever filed itemized deductions of any kind know the concept well. But when it comes to saving the most money possible and doing it lawfully, one must understand the intricacies of depreciation.
Depreciation refers to two different, but very closely related concepts.
- decline in value of assets, and
- allocation of the cost of assets to periods in which the assets are used.
The first one affects businesses and entities. When your business uses tools to get the job done, and when using these instruments or tools wear down and consequently their value lowers, this is depreciation
The most current overview definition of depreciation is: Depreciation is the deduction of the cost of business property of a number of years. This is most important for business owners of any size. Regardless if you run a businessness with 2000 employees or are a sole proprietorship with just you as the only employee, you must account for depreciation. If you use property, such as a car, for both business and personal use, you may deduct only the percentage that is used for work. There is a five point checklist that will guide you in this deduction:
It must be property you own.
It must be used in a business or other income-producing activity.
It must have a determinable useful life.
It must be expected to last more than one year.
It must not be excepted property (certain intangible property, certain term interests and property placed in service and disposed of in the same year).
Simple line Depreciation
This is the simplest and most common form of depreciation used. The formula is quite simple.
cost of fixed asset - residual value
annual depreciation expense = -----------------------------------------------------
Useful life of asset (years)
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